Government officials warn of wireless patent wars

Senior Obama administration officials on Wednesday expressed concern about the escalating patent wars that have gripped the wireless industry, warning a Senate panel that the import bans that litigants such as Google’s Motorola Mobility division and Apple have been seeking could pose significant harm to consumers by driving up prices and limiting choice.

Appearing before the Senate Judiciary Committee, representatives from the Department of Justice and Federal Trade Commission stressed that seeking an exclusion order or injunction to prohibit imports of certain smartphones or other devices should be a strategy of last resort for patent holders, only to be exercised after good-faith royalty negotiations have failed and a remedy cannot be obtained through civil courts.

But often that has not been the case, as recent months have seen a flurry of litigation through which a company appeals to the U.S. International Trade Commission (ITC) to bar imports of a rival’s device that allegedly infringes on its patents.

“These issues are currently front and center in the markets for smartphones and tablets, where the risk of competitive harm from such orders can be especially acute,” said Edith Ramirez, a commissioner at the Federal Trade Commission. “Complex, multi-component products are the norm in IT markets. For example, a smartphone has hundreds of components and technologies that enable it to communicate over wireless networks, stream video, access the Internet and perform all of the functions that consumers expect. The vast majority of these components and technologies are covered by patents.”

Ramirez said that a “conservative estimate” of the number of patents in a typical smartphone hovers in the tens of thousands, many of which are so-called standard-essential, meaning that they are tied to an industry standard that underlies core operations of the device, such as connecting to a 3G network or communicating over a Bluetooth connection.

Often, when a standards-setting organization approves a certain technology, it will secure a commitment from the owner of the essential patent to license its intellectual property to competitors under fair, reasonable and non-discriminatory (FRAND, or, alternatively, RAND) terms.

But a spate of lawsuits and countersuits seeking import bans, pitting Apple against Motorola Mobility and HTC, Motorola Mobility against Microsoft in a case involving technology in the Xbox 360, and others, has left many officials worried that the framework of standard-essential patents has become rife with abuse.

“In recent months, we have seen a growing number of companies engage in what some are calling the next wave in the tech patent wars,” said Judiciary Committee Chairman Patrick Leahy (D-Vt.). “Companies that previously cross-licensed their technologies with other companies in the market are increasingly seeking to block their competitors instead.”

Both Ramirez and Joseph Wayland, acting assistant attorney general at the Justice Department, told Leahy’s committee that they are concerned with the rash of patent litigation at the ITC, arguing that, as a general matter, royalties disputes in cases where two companies are at an impasse should be the province of district courts, where judges can provide injunctive relief and damages, rather than seeking an exclusion order barring imports at the ITC.

But perhaps even more alarming than the sheer number of cases is the technology that is in play, Wayland said, stressing the degree to which the disputed devices have become essential parts of consumers’ lives.

“I think what our concern is is that we see not so much the volume of matters but the type of matters that area involved,” he said. “So we’re talking about transactions involving products that affect the lives of millions of consumers and involve billions of dollars of potential damages. That’s somewhat new in the sense that, you know, blocking a particular cell phone application could cause consumer harm across millions and millions of people, so it’s the type of the practice that we’re concerned about as much as the volume.”

Both witnesses suggested that that form of “patent hold-up” can undermine competition within a given market, with negative effects for consumers such as fewer choices and higher prices.

Moreover, both agreed with the guidance on damages awards offered by Richard Posner, the district court judge in Illinois who recently threw out Apple’s request for an injunction against Motorola Mobility. Posner urged his colleagues on the bench to weigh the net contribution of a disputed technology in the overall success of a product in determining the extent of the damages incurred as a result of the infringement. So in a smartphone with tens of thousands of patented technologies in use, what is the actual monetary contribution of a single component?

“Some of the reasons that we see there being so much litigation seems to be that patent damages are outsized and larger than would be necessary to properly compensate for IP technology,” Ramirez said. “So the idea would be that if you properly align the reward with the contribution that’s being made, that is likely to reduce the incentive for parties to end up litigating in court.”

Apple is widely expected to appeal Posner’s dismissal, and the dispute with Motorola is also pending before the ITC.

Wayland, without naming individual cases, said that the DoJ’s antitrust division is keeping an eye on a number of standard-essential patent disputes pending before the ITC in which mobile firms are seeking an exclusion order against a competitor’s product.

“We have continued closely to monitor the use of FRAND-encumbered standard-essential patents in the wireless device industry to ensure that they are not used to stifle competition and innovation in this important industry,” he said.

The ITC is obligated to consider public-interest concerns in its evaluation of those cases, and factors such as consumer harm could be enough to sway the panel against banning imports of a popular device.

Both witnesses seemed alarmed at the mounting requests for exclusion orders among litigants that would cut off imports. Neither suggested a blanket rule prohibiting such relief — after all, in certain cases where an infringing party operates outside the jurisdiction of U.S. courts, for example, an ITC exclusion order might be an appropriate remedy. But they argued that those cases are the exception, and that companies that agree to license their standard-essential patents have an obligation to negotiate in good faith and steer clear of the extortionate activity they are often accused of.

“Once you make a RAND commitment, I mean, you are saying there’s a commitment to license on RAND terms,” Ramirez said.

[Kenneth Corbin is a Washington, D.C.-based writer who covers government and regulatory issues for CIO.com.]